The USD has been generally weak on the view the Fed will not raise interest rates in the near future but there is a problem – inflationary pressure is building and could force the Fed to act quick than the market expects. The USD is at a bearish extreme and any traders looking for a rally should look at inflation indicators and bond yields.
At present the broad based Dollar Index is near December 2020 lows…
The move down since Friday was due to a big miss in terms of Non Farm Payroll but this one report doest change the big picture that US economic data has been generally coming in above forecast. The JPM “Economic Activity Surprise Index” has risen in recent weeks as we can see on J.P. Morgan “Economic Activity Surprise Index”; diffusion index.
Inflationary Pressure is building and we can see it on the chart below which shows the Bloomberg commodity Index v two inflation indicators CPI and PCE
The chart below from Nordea shows CPI on the rise
The Feds Favourite Measure of Inflation is the PCE. The chart below shows consumer spending against the PCE. As we can see consumer spending has soared recently and the PCE looks set to play catch up.
Finally a chart which has a very apt comment from the Market Ear:
The massive rally in commodities where commodities such as iron ore and lumber have out performed Bitcoin is clearly inflationary as we look forward. The key to a USD rally is bond yields which we can see on the chart below, rising yields are an indication of inflationary pressure and the chances of higher interest rates. After spiking below 1.500 after the poor NFP number we have recovered to above 1.600 and if we start moving up from here the USD will find support.
The Fed have made it clear they see inflationary pressure as temporary but the facts don’t indicate this and we could see the Fed forced to act in terms hiking rates quicker than the market expects. In terms of the DXY we could test recent lows but as long as bond yields stay above 1.500 we see no big melt down and if yields firm so too will the USD. The key level to watch is 91.00 which if taken out could warn of a major USD rally.
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